American Automakers – It’s Time to Get Bullish

American automakers are emerging as industry leaders after decades of pulling up the rear.

Wall Street does not see it; I do, and you should. It is time to invest in America – for the very long term, the long term, the mid term and the short term, including right now.

The United States is in the very early stages of an energy-driven manufacturing renaissance and there are tremendous opportunities out there. I have two specific ways to play them. If the current markets make you nervous, sell (write) puts. If you have a longer-term perspective, but shares and sell calls against them (a covered call strategy). There are no hidden gems here – they are out in the open, known – and undervalued because Wall Street still has put “energy” and “manufacturing” in the same sentence. What a surprise.

The rebound starts with the automakers. The key to auto sales is not income, at least sort of. It is the relative cost of a new car payment compared to repairs and gasoline costs for an older car and the average credit score needed to get a loan. The score needed to get a loan is very low – but auto loan defaults are also below historical norms, so it is not a problem.

The average age of a car on the road is more than 10 years old. Trade that dog in for a car requiring no maintenance and get much better gas mileage, and the math works, creating strong demand.

What about profitability? Ford (F) and General Motors (GM) both have new versions of their most profitable vehicles – medium- and heavy-duty pickup trucks – out this year. Margins are very high compared to other vehicles, and this trend will accelerate as the economy recovers and more trucks go into service. Both companies are going to make natural gas powered pickups – even more profit margin to capture –and I see many years of solid growth.

I visited the GM pickup truck assembly plant as part of my research for a book, Made in America, and what stood out was an emphasis on quality that puts GM trucks ahead of all others in J.D. Power rankings and GM and Ford together beating out foreign competition in that crucial category of performance.

At present, I like Ford’s stock better than GM’s; it has more room to run. Since I like it right here – and would not mind owning it at current prices – if you sell to open the F $15.50 July week one put expiring July 5, you will collect roughly $15 contract. That is the equivalent of $750 a year, or a 50% or so return on your capital. If you buy Ford shares and sell the F $15.50 call and get called out (meaning you have to sell your shares at the $15.50 strike price) you do about the same.

If you prefer GM – over the long haul, the company looks a bit better due to lower costs via bankruptcy and a growing presence in China – you should consider buying the shares and selling (writing) calls. Or, since the stock is having trouble breaking away from $33 short term – this is where the government and a lot of shareholders got in – it’s good level to sell write puts against.

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